In a recent development, the Union Ministry of Finance has incorporated Virtual Digital Assets (VDA), also known as Cryptocurrency, under the Prevention of Money Laundering Act (PMLA). This decision came into effect through a gazette notification. The key take-away from this development is the attempt to increase transparency in cryptocurrency transactions, which have been notoriously elusive so far.
The Necessity of This Action
The world is continuing to witness a rising chorus for transparency in the fast-evolving cryptocurrency transactions. The digital finance era demands strict compliance to safeguard investors’ interests and the country’s financial health. Regulatory bodies globally have turned their focus towards this sector, aiming to streamline it and bring more accountability.
This initiative is also expected to empower investigative agencies to take actions against crypto firms if necessary. Under the PMLA Act, VDA service providers or businesses are now counted as ‘Reporting Entities’. As a result, they must adhere to the reporting and KYC norms similar to other regulated entities like banks, securities intermediaries, payment system operators, and so forth.
What Does the PMLA Cover?
The act enfolds various activities related to cryptocurrency namely, exchange between virtual digital assets (VDA) and Fiat Currencies, exchange amongst different forms of VDAs, transfer of VDAs, safekeeping or administering VDAs or tools enabling control over them, and involvement in and delivery of financial services related to a VDA issuer’s offer and sale.
The Concerns Associated
The new regulation doesn’t offer entities adequate time to comply with the updated norms, making it a concern to the industry. In the absence of a central regulator, crypto entities may have to deal directly with enforcement agencies such as the Directorate of Enforcement (ED).
Post the announcement of the tax regime in the 2022 Union Budget, approximately 17 lakh Indian VDA users shifted from domestic centralized VDA exchanges to foreign counterparts. This lead to over USD 3.8 billion in trading volume being moved from local to international crypto platforms. This shift could decrease transaction traceability and tax revenues, which contradicts the main objectives of the policy architecture.
Legal Status of Crypto in India
Despite levying a tax on cryptocurrencies in the Union Budget 2022-23, the government is yet to frame specific regulations. Previously, the Reserve Bank of India had proposed a ban, but this was quashed by Supreme Court intervention. The finance minister further flagged RBI’s concerns in July 2022, stating that any effective regulation or ban on cryptocurrency would require “international collaboration”. In April 2022, India implemented a 30% income tax on gains derived from cryptocurrencies. Additionally, a 1% tax deducted at source on cryptocurrency transactions commenced in July 2022.
The Way Forward
For combating money laundering through cryptocurrency, effective laws and guidelines need to be in place. Investors need to fear penalization for wrong practices and exchanges must be mandated to track transfers exceeding a certain limit within a tax year and report them to tax authorities. To mitigate the impact of the VDA tax structure, the government should consider a progressive tax system with differing rates for short-term and long-term gains, aligning with global best practices.